Cramer: don’t own the wrong dollar store

Investors gave Family Dollar a "gold star," after the company reported strong Q3 earnings. Mad Money host Jim Cramer looks at the pressure facing the company, and whether it's worth a buy at these levels.

Considering Family Dollar has gained 10% in the past 5 days and Dollar General has advanced nearly 9%, you may be inclined to buy dollar stores, broadly.

But Cramer thinks that would be a mistake.

Looking at the numbers recently posted by Family Dollar, it would look as if the stock is a buy. After all, sales at stores open at least a year rose 2.9 percent. Also Family Dollar said it now expects a profit of $3.77 to $3.82 per share for the fiscal year ending this quarter.

But Cramer doesn't want you to be fooled – he doesn't think Family Dollar a buy in the least.

"Family Dollar soared this week because it delivered a quarter that was better than people feared. However, people feared that the quarter would be really bad, so that's not much of an achievement," Cramer said.

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"Going forward, though, the company's about to be facing some tough comparisons, and FDO's management has said that sales of more discretionary items could be under pressure. Plus, the bears are concerned that Family Dollar's gross margin—what they make after the cost of sales—may have peaked."

Instead of buying Family Dollar Cramer is a seller into strength. "Considering the headwinds, at $70, this one just feels expensive to me."

However, Dollar General is another story.

"The company expects sales to ramp in the second half, resulting in 4 to 5 percent same store sales growth—much better than what Family Dollar's forecasting. Meanwhile, management has said that they're remodeling hundreds of stores, something that we know tends to juice sales," Cramer said.

Also he added Dollar General is cheaper; it sells for 14.8 times next year's earnings estimates with a 15% long-term growth rate, while Family Dollar trades at a higher multiple, 16.4 times earnings, with lower, 12% growth.

However, it's not his favorite play in the space. That honor belongs exclusively to Five Below.

"I like to think of Five Below as the $5 store, because everything they sell costs 5 bucks or less. However, the bigger difference between Five Below and Family Dollar or Dollar General is the growth trajectory. "Five Below is still a small, up-and-coming, regional to national growth story," he said. "By contrast both Family Dollar and Dollar General are mature. Although Five Below stock is up 18% for the year, I'm confident that it can keep going higher, simply because of the growth potential."